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Is Westport Finally Back on Track?

Throughout 2011 and into 2012, the high cost of oil-based fuels and the low cost of natural gas stoked excitement over several stocks designing vehicles that run on alternative energy. Among this crowd, two companies have really stood out -- and ironically, they've taken opposite directions during the last year, providing a potential catch up period for the laggard.

With a focus on natural-gas engines for trucks, Westport Innovations (NASDAQ:WPRT) soared into the start of 2012. But the stock has spent the last 18 months losing 40% of its value.Conversely, Tesla Motors (NASDAQ:TSLA) focused on building premium electric cars and had a more muted stock performance before its well-discussed 400% gain over the past 12 months. Now, the question is whether Westport can reignite its previous excitement, and catch up to Tesla's gains.

Are investors fleeing Westport's stockjust as the catalyst to own it hits production? Will the Cummins (NYSE:CMI) jointly developed engine reignite the growth that sent Westport's stock soaring in 2011? As is the case with many new technology developments, the market gets way ahead of the concept before eventually capitulating, right as the catalyst for its shares' rise actually hits the markets.

New Cummins engineThe regional-haul natural-gas trucking market has been idling for a few years while it awaited the much-anticipated Cummins Westport ISX12 G 12-liter engine. The 400HP version of the engine operates exclusively on natural gas (compressed or liquefied) using a proprietary spark-ignited technology.The engine, based on the Cummins 1SX12 diesel platform, is just what the regional-haul trucking industry needs for highway use.

Ironically, the stock hit multi-month lows just asthe engine hit production in August -- an engine expected to boost sales for the Cummins Westport JV.Clean Energy Fuels has consistently listed the engine as a necessary catalyst to boost demand for the fueling stations it's building along the U.S. highway system.

Production of the new engine isn't expected to reach a commercial run rate until the end of the year, but even before that ramp-up, the joint venture sold 38% more units year over year during the second quarter. Still, that only translates into 2,716 engines, which provides plenty of upside for Westport's future growth. Right now, LNG engines are only listed as around 1% of its total sales.

Joint ventures hiding growthAnother potential detraction from the investment thesis with Westport is that the two primary business lines are operated as joint ventures. That ownership position prevents the company from recording those segments' revenue streams; instead, it can only report their operating income, which for now, is far more muted than revenue growth.

The Cummins venture generated revenue growth of 37% and reached $78 million for the second quarter. With the new engine only now hitting production, the venture should see a huge increase in 2014.Cummins will benefit from the JV, but its $17 billion revenue base will only see a small blip from the progress of natural-gas engines.

The Weichai Westport, or WWI, venture in China saw incredible 122% revenue growth on a 133% surge in engine sales. In total, the venture sold 12,410 engines as demand for natural-gas trucks soared in China. Westportonly owns a 35% interest in WWI, so it can only report a portion of that venture's income and none of its revenue.

Again, investors looking at the headline numbers missed the great strides Westport made in its two primary business lines. The drop in reported revenue was even more notable, with the margins from these ventures sagging as both of them build out production levels. With Weichai Westport's total operating income virtually flat, most investors missed its revenue gains.

Tesla experienceWhile Westport continues to struggle toward profitability, investors might want to review how Tesla fared at a similar stage in its development. Back in 2012, most analysts questioned whether the electric-car maker would ever become profitable. But the company quickly went from substantial losses in 2012 to a small profit this year, and the stock soared.

The key is that Tesla was closer to actual vehicle production than Westport, whose much-hyped CWI engine only hit production last month. Another distinction is that consumers could more quickly adopt a Tesla car than a fleet operator could transition to natural-gas engines. But once this shift within the trucking industry gains momentum, Westport and the CWI joint venture might see rapid adoption.

Bottom lineAs with most technology development firms, eventually it becomes time for the technology to prove itself. The low domestic natural-gas prices, (that give Westport an advantage), may not last forever. The Cummins Westport engine needs to be a game-changer, and now that production has finally started; all signs indicate it is only a matter of time before the joint venture generates significant income for Westport.

While cash is a major concern, the fact that Westport's main products are now in production should turn the company into a growing machine, if only investors notice the growth of the joint venture. Going forward, investors need to pay attention to bottom-line improvements, not the stagnant top line, as the joint ventures move from development stage to profitable growth. The stock is unlikely to see the type of gains made by Tesla, but with the new Cummins Westport engine likely to fuel additional excitement over natural gas, Westport has the potential to post strong returns.

Mark Holder and Stone Fox Capital have no positions in any stocks mentioned. The Motley Fool recommends Cummins, Tesla Motors, and Westport Innovations. The Motley Fool owns shares of Cummins, Tesla Motors, and Westport Innovations. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.